In tonight’s State of the Union address, President Barack Obama is expected to propose what’s generally being called an “automatic IRA.” This scheme for increasing individual retirement savings is being touted as a "common sense" approach to the pension crisis, a "third way" that enjoys broad bipartisan support. But lurking just beneath the surface of this popular proposal is a potentially massive gift to Wall Street--and possibly, a back-door route to undermining Social Security in favor of private investments.
Under the automatic IRA plan, the government would help set up a system of individual retirement accounts in which workers would be automatically enrolled if their employers don’t offer their own 401Ks. A minimum amount of pre-tax earnings–under current proposals, 3 percent–would automatically be deducted from employees’ pay and direct-deposited into their accounts. Individuals could increase the amount of the automatic deposits, or they could opt-out altogether. They would also have some choice about where to place their investments; otherwise, it would automatically be placed in what planners are calling a “diversified portfolio.”
On the surface, it sounds like a sensible plan. AARP is supporting it, and says it could help some 50 million of the 75 million Americans whose employers offer no retirement plan. It was developed through a rapprochement between the right and what passes for the left: The idea emanates from a group called the Retirement Security Project (RSP), led by David John of the Heritage Foundation, who hammered out a joint scheme with William Gale of the Brookings Institution. It’s supported by the White House, and expected to breeze through Congress. The publication Life and Pensions reported earlier this week:
John, who is a senior research fellow with Washington, DC-based think-tank the Heritage Foundation, as well as holding a position on the RSP, said he welcomed the initiative’s inclusion in the state of the union address. Having the President speak about it on Wednesday will give it a far higher profile than it would otherwise get,” he said.
John said he expected the bill to have a fairly easy passage, given the lack of opposition. It was included in the 2009 budget, but the time taken over the controversial healthcare reform bill meant it slipped off the legislative agenda.
The presence of David John as the proposal’s spokesperson and primary architect ought to be enough to make progressives take a closer look at a proposal that’s promoted as an obvious no-brainer. With the exception of the automatic IRA, John is a sharp critic of Obama’s economic approach, including all of the other proposals the president is expected to outline tonight. “He’s basically giving tax money to people regardless [if] they have actually paid any taxes or not,” John said yesterday. “And many of these [proposals] sound much better as they’re intended to than they would actually work in practice — so I think that some of those are going to have some severe handicaps.”
In addition--as a quick glance at his writing on the Heritage Foundation web site reveals--John was a huge booster of Social Security privatization. The idea of privatizing this New Deal program and turning over its billions to Wall Street has been the fondest hope of the right since the days of the Reagan administration. Remember that it was just five years ago, in 2005, that George W. Bush made privatizing a portion of Social Security a centerpiece of his State of the Union address. Conservatives fought hard for this initiative, which would have diverted 2.5 % of Social Security withholdings into individual retirement accounts similar to those now proposed, and invested the funds in a similar ”diversified portfolio” of Wall Street products. But the pubic, wisely, distrusted Bush’s motives, and by the end of the year, it was clear that he would never win broad support for the privatization plan. In the early months of 2006, the Retirement Security Project, under John’s leadership, began actively promoting the automatic IRA scheme.
It's quite possible to view the automatic IRA as a stealth attack on Social Security--a foot in the door in the quest to cut entitlements. Unlike Bush’s plan, the automatic IRA would not take funds out of Social Security, but rather directly out of workers’ paychecks. But imagine, if you will, that at the same time, cuts are made to Social Security. Tonight Obama is expected to pitch his version of the fast-track ”deficit reduction commission” recently proposed (and defeated) in the Senate, which clearly would set its sights largely on entitlements, including Social Security. So we could see Americans’ Social Security cut by a small percentage (remembering that raising the retirement age is, effectively, a cut), while simultaneously, a small percentage of their pay is deducted and invested in the private sector. And suddenly–presto–George W. Bush’s wildest dreams have come true.
There’s yet another facet to the automatic IRA plan, which would effectively channel not only worker earnings but also government funds into private retirement accounts. On Monday, Obama and Vice President Joe Biden addressed the Middle Class Task Force set up a year ago. Biden pitched the automatic IRA proposal, saying “It’s a simple proposition, but it’s a big deal,” and then outlined the plan for a government “match” of individual savings:
It also means simplifying and expanding the saver’s credit, which helped working families save for retirement by providing a 50 percent match on the first $1,000 of retirement savings. So if you put a thousand bucks into a retirement account, your government is going to add even more — another $500. It’s an incentive, but long term it saves the government a lot more money than the 500 hundred bucks put in if in fact we find we have a generation that’s able to care for themselves and not have to look to the government to provide some basic needs they need. This will not only help build up a nest egg for existing savers, but it’s going to encourage workers who currently have no retirement accounts to start to save.
The matching tax credit, too, might sound like a nice plan, until you think about what it actually means: Instead of going into the U.S. Treasury, this money, too, will go straight to Wall Street, in the form of IRA investments in private retirement funds. And suddenly–presto–it’s yet another government handout to Wall Street. Even without the tax credit, there’s no doubt that the automatic IRA could be the best thing to happen to Wall Street since the creation of the pre-tax 401K.
It’s hard to fathom why Americans would want to dump more money into an IRA that will end up in unguaranteed mutual funds, so soon after seeing our private retirement investments take a beating in the recession. Just a year ago, we were all kicking ourselves for trusting Wall Street with our nest egss, and thanking our lucky stars that at least we hadn’t privatized Social Security.
Nonetheless, the automatic IRA plan seems destined to forge ahead, steamrolling over other, more secure options. One such proposal was made by pension expert Teresa Ghilarducci, who suggested setting up accounts that would have a guaranteed government return and be run by the Social Security administration. (I outline her plan in my recent Mother Jones article on 401Ks.) But once again, the American government prefers to skirt direct responsibility for looking after its elders, and instead pass us off into the greedy, grasping hands of Wall Street–which will no doubt be laughing all the way to the bank.